The Bangladesh Bank (BB) has announced a plan to implement an Expected Credit Loss (ECL) methodology-based provisioning system by 2027.
This move aligns with the International Financial Reporting Standards (IFRS 9) and represents a transition from the current rules-based loan classification system to a more forward-looking, risk-based approach as recommended by the International Monetary Fund (IMF).
The ECL methodology will enable banks to assess future risks of default rather than relying solely on historical data, which characterizes the existing backward-looking method. This framework is already widely adopted in advanced and many developing economies and involves evaluating potential risks through macroeconomic variables and other relevant financial factors, often necessitating the expertise of actuary professionals.
In a circular issued on January 23, 2025, the central bank emphasized its commitment to enhancing banks’ risk management capabilities and improving financial reporting transparency. To facilitate this transition, BB has outlined a detailed roadmap for banks, which includes several key milestones:
- By March 2025: Banks must establish an IFRS 9 implementation team led by their managing director or CEO and prepare an action plan approved by their board of directors.
- By June 2025: A comprehensive database containing borrower-specific data must be developed, covering various classifications and macroeconomic factors.
- By September 2025: Banks are required to submit a pre-assessment report detailing their transition plan and any anticipated challenges.
- By December 2025: Training sessions for employees involved in ECL-based loan classification must be conducted.
- By June 2026: Banks will finalize automated ECL-based loan classification models according to BB guidelines.
- By September 2026: Pilot implementations should cover at least 25% of the total loan portfolio, increasing to 50% by December 2026.
This initiative follows guidance from the Basel Committee on Banking Supervision (BCBS) regarding sound credit risk practices and aims to improve the industry’s management of nonperforming loans (NPLs).
